Q4 2023 Hope Bancorp Inc Earnings Call

Good afternoon, and welcome to the Hope Bancorp 2023 fourth quarter earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.

To withdraw your question. Please press Star then two.

Please note. This event is being recorded I would now like to turn the conference over to Angie Yang Director of Investor Relations. Please go ahead.

Angie Yang: Thank you Daniel Good morning, everyone and thank you for joining us for the Hope Bancorp 2023 fourth quarter Investor Conference call as usual, we will be using a slide presentation to accompany our discussion. This morning, which is available in the presentations page of our Investor Relations web.

Right.

Angie Yang: Beginning on slide two let me begin with a brief statement regarding forward looking remarks. The call. Today contains forward looking projections regarding the future financial performance of the company and future events. These statements may differ materially from actual results due to certain risks.

Angie Yang: And then certainties. In addition, some of the information referenced on this call today are non-GAAP financial measures for a more detailed description of the risk factors and a reconciliation of GAAP to non-GAAP financial measures. Please refer to the company's filings with the SEC as well as the Safe Harbor state.

Angie Yang: <unk> in our press release issued this morning.

Angie Yang: Bancorp assumes no obligation to revise any forward looking projections that may be made on today's call. Now we have allotted one hour for this call presenting from the management side today will be Kevin Kim Hope Bancorp's, Chairman, President and CEO Giuliana Liska, our Chief Financial Officer.

Angie Yang: And Peter Koh, our Chief operating Officer is also here with us as usual and will be available for the Q&A session with that let me turn the call over to Kevin Kim Kevin.

Kevin Sung Kim: Thank you Angie good morning, everyone and thank you for joining us today.

Kevin Sung Kim: Now, let's begin on slide three with a brief overview of the quarter.

Kevin Sung Kim: For the fourth quarter of 2023, we earned net income of $26 $5 million or 22 cents per diluted share income. This quarter included two notable items the FDIC special assessment of $3 $1 million after tax.

And the restructuring charge of $8 $7 million after tax <unk>.

Kevin Sung Kim: Excluding these notable items, our net income was $38 million up 26% quarter over quarter.

Kevin Sung Kim: Our earnings per share were 32 cents up 28% quarter over quarter.

Kevin Sung Kim: Continued focus on expense management and meaningful improvements in our asset quality were important drivers of our net income growth. This quarter in October 2023, we announced a strategic reorganization designed to enhance shareholder value over the long term.

We realigned our structure around key lines of business and product positioning Banco Pope to operate more efficiently support high quality loan and deposit growth and deliver improved returns in the years to come we.

We are making substantial progress on this transformation focusing management efforts and attention on process and efficiency improvement to empower our frontline to grow their portfolios and expand customer relationships.

Kevin Sung Kim: As part of the reorganization plan and as previously announced we will consolidate certain branches in the first quarter and the first half of 'twenty 'twenty four the cost of which was accrued as part of the fourth quarter 2023 restructuring charges continuing on to slide four.

Kevin Sung Kim: We ended the year with a very strong capital position and all our capital ratios expanded from September 30 of 'twenty to 'twenty. Three we grew tangible book value of 6% quarter over quarter and year over year as of December 31 of 2023.

Kevin Sung Kim: Our total capital ratio was 13, 92% at 69 basis points from September 30th and our common equity tier one ratio was 12, 28% up 61 basis points quarter over quarter adjust.

Kevin Sung Kim: Adjusting for the allowance for credit losses, and including hypothetical adjustments, where investment security marks all our capital ratios remain high or board of directors declared a quarterly common stock dividend of <unk> 10 cents per share payable on February 23rd to stockholders of record.

Kevin Sung Kim: As of February 9th of 'twenty 'twenty four.

<unk> to slide five.

Kevin Sung Kim: At December 31 of 2023, our total deposits were $14 $8 billion average deposits in the fourth quarter were $15.3 billion, a decrease of less than 3% quarter over quarter during the fourth quarter, we reduced our brokered time deposits.

Kevin Sung Kim: By $450 million or 25% from September 30th quarter over quarter demand deposits declined reflecting seasonality and funds flows from commercial customers in the residential mortgage industry.

These customers are unrelated to the exit of our residential mortgage warehouse line business normally the seasonal outflow of these funds in the fourth quarter rebuilds in subsequent quarters.

Kevin Sung Kim: Our consumer deposits were stable quarter over quarter and represented 37% of total deposits at year end 2023.

Year over year, our consumer deposits are up 5%, which is notable given the disruption in the banking industry in the first half of 2023.

Kevin Sung Kim: This reflects the strength of our deposit franchise in the communities that we serve.

Our gross loan to deposit ratio was 94% at December 31 was 23, we are targeting operating at a loan to deposit ratio below 95% move.

Kevin Sung Kim: Moving on to slide six.

At December 31 of 2023, our loan portfolio totaled $13.9 billion, a decrease of 3% quarter over quarter average loans for the 2023 fourth quarter totalled $14.1 billion down 3% linked quarter.

Kevin Sung Kim: During the quarter, we completed the exit of our residential mortgage warehouse line business, which accounted for $65 million of the decline in loan balances looking I had at 2024, following our strategic reorganization, our frontline is pivoting and gearing up.

Kevin Sung Kim: Growth Accordingly, we expect to see positive loan growth this year.

Kevin Sung Kim: On slide seven and nine.

Kevin Sung Kim: I'm, sorry, seven and eight we provide more details on our commercial real estate loans, which are well diversified by property type and a granular in size the loan to values remain low across the portfolio with a weighted average of approximately 45% at December 31 of 2023.

Kevin Sung Kim: It.

Kevin Sung Kim: The vast majority of our commercial real estate loans at full recourse with personal guarantees asset quality remains strong with 99% of the commercial real estate portfolio being pass graded at yearend 2023, and with no signs of any systemic risk.

Kevin Sung Kim: <unk>.

Kevin Sung Kim: With that I will ask Giuliana to provide additional details on our financial performance for the fourth quarter Giuliana.

Giuliana Liska: Thank you, Kevin and good morning, everyone.

Giuliana Liska: Beginning with slide nine.

Giuliana Liska: Net interest income totaled $126 million for the fourth quarter of 2023, a decrease of 7% from the third quarter.

Giuliana Liska: The preceding third quarter included $3 million of recovered interest income related to one borrower relationship which contributed six basis points of net interest margin in the third quarter, excluding the recovery net interest income decreased 5% quarter over quarter.

Giuliana Liska: Net interest margin for the 2023 fourth quarter contracted 13 basis points to 270%.

Giuliana Liska: Excluding the interest income recovery from the third quarter, the net interest margin contracted seven basis points quarter over quarter.

Giuliana Liska: The linked quarter change in net interest income and net interest margin also reflected a higher cost of interest bearing deposits and a decrease in the average balance of loans, partially offset by a decrease in the average length of interest bearing deposits and higher yields on investment securities and other earning assets.

Giuliana Liska: At the end of the first quarter of 2024, we plan to pay off our bank term funding program borrowings of $1 7 billion with interest, earning cash the positive contribution to net interest income from the B T. S. P less $4 million in the fourth quarter when did D. G. F. P comes up for renewal at the end of March and beginning of April this pause.

Is it just spread opportunity will go away and we will pay off the borrowings. This will have an impact of reducing our average earning assets and net interest income after the first quarter of 2024.

Moving on to slide 10, our average loans of $14.1 billion decreased approximately 3% linked quarter and the average yield on our loan portfolio declined three basis points to $6, 24%.

Giuliana Liska: The interest income recovery that I mentioned on the previous slide contributed seven basis points to the loan yield in the preceding third quarter.

Giuliana Liska: Excluding the interest income recovery loan yields expanded in the fourth quarter. There were no material interest income recoveries in the fourth quarter.

Giuliana Liska: Average deposits declined less than 3% to $15 $3 billion in the quarter and the average cost of deposits increased to 315% up 17 basis points quarter over quarter. The increase partially reflects the repricing of maturing promotional Cds originated a year ago.

Giuliana Liska: Moving on to slide 11.

Noninterest income was $9 million for the fourth quarter, an increase of 12% from $8 million in the third quarter of 2023 noninterest.

Giuliana Liska: Noninterest income growth was distributed across our various fee income businesses.

Similar to last quarter, we did not record any gain on the sale of SBA loans.

Giuliana Liska: Current secondary market premiums are approximately 6% and then it's more economic to retain SBA seven eight production on balance sheet at this time we.

Giuliana Liska: We plan to return to selling our SBA seven eight production when the premiums in the secondary markets improve which we anticipate will happen after the fed reduces interest rates.

Giuliana Liska: Moving on to noninterest expense on slide 12, our fourth quarter noninterest expense of $100 million included two notable items $11 million of pre tax restructuring charges related to our reorganization and $4 million of pre tax accrual for the F. D. A C special assessment.

Giuliana Liska: Excluding these notable items, our operating expense was $85 million and decreased 2% quarter over quarter, our fourth quarter salaries and benefits expense was $47 million, a decrease of $4 million or 7% from the third quarter. This reflected the impact of the head count reduction at the end of October.

Giuliana Liska: <unk> undertaken as part of our reorganization.

Giuliana Liska: Now moving on to slide 13, I will.

Giuliana Liska: Review, our asset quality, which improved meaningfully during the fourth quarter.

Giuliana Liska: Our nonperforming assets at December 31, 2023 decreased 26% quarter over quarter to $46 million and represented 24 basis points of total assets and improvement from 31 basis points as of September 30th.

Giuliana Liska: [laughter] sized loans decreased 11% from September 30th 2000, $23 million to $322 million the linked quarter reduction was in both special mention and substandard loans.

Giuliana Liska: Net charge offs for the 2023 fourth quarter were very low at $1.8 million or only five basis points of average loans annualized.

Giuliana Liska: For the fourth quarter, our provision for credit losses was $1 $7 million.

Giuliana Liska: At December 31, 2023, our allowance for credit losses was $159 million, representing 115 basis points of loans receivable, which was an increase in coverage of four basis points from the end of the prior quarter.

Giuliana Liska: With that let me turn the call back to Kevin.

Kevin Sung Kim: Thank you Giuliana moving onto slide 14.

Kevin Sung Kim: The 2023 fourth quarter was a key quarter for bankable as we laid the foundation to build a stronger and more efficient regional bank that is highly focused on broadening and deepening client relationships on slide 15, we provide our outlook.

Kevin Sung Kim: We are presenting our expectations for the fourth quarter of 2024, compared with the fourth quarter of 2023.

Kevin Sung Kim: Which we feel will provide a better sense of the direction in which we are building our company as we go through the transformation process.

Kevin Sung Kim: Fourth quarter to fourth quarter, we expect average loans to grow at a percentage rate in the low single digits up from $14.05 billion in the fourth quarter of 2023.

Kevin Sung Kim: We have finished exiting noncore businesses and we anticipate pay downs in the loan portfolio to moderate in 'twenty 'twenty four we project growth to be weighted to the second half of the year and plan to maintain an average loan to deposit ratio below 95%.

Kevin Sung Kim: In terms of net interest income.

Fourth quarter to fourth quarter, we expect net interest income to decline at a percentage rate in the low single digits from $126 million in the fourth quarter of 'twenty. Three. This includes the net impact of our planned payoff of the bank term funding program, which as Julia.

Kevin Sung Kim: <unk> mentioned contributed a positive $4 million to our net interest income in the fourth quarter of 2023.

Kevin Sung Kim: Excluding the impact of the Bts P. We would expect our fourth quarter 2024, net interest income to be up modestly compared with the fourth quarter of 2023 benefiting from loan growth and an improved cost of funds in our outlook we are assuming five.

Kevin Sung Kim: So that's one fed funds rate cuts beginning with may of this year or a year and fed funds upper target rate of four point to 5%.

Kevin Sung Kim: In 'twenty to 'twenty four we expect to return to selling SBA loans when the gain on sale premiums improve which we expect should occur by the fourth quarter of 2024 in our outlook for operating expenses, excluding notable items fourth quarter to fourth quarter, we expect our.

Kevin Sung Kim: Our operating expenses to decrease by more than 5% from $85 million in the fourth quarter of 2023 cost savings from our restructuring will be partially offset by merit increases planned hiring to support revenue generation and business development as well as kantar.

Kevin Sung Kim: Renewed technology investments to improve operational efficiency and the consumer customer user experience a portion of the cost savings from our restructuring was realized in the fourth quarter of 2023 expense run rate and in our outlook, we anticipate that our operating.

Kevin Sung Kim: Expenses will continue to decrease pool there.

Kevin Sung Kim: Our outlook translates into positive operating leverage when comparing the fourth quarter of 'twenty four with the fourth quarter of 'twenty three with the decrease in expenses expected to exceed the headwinds to net interest income SBA gains in the fourth quarter of 'twenty 'twenty four.

Kevin Sung Kim: Would be incrementally additive to the positive operating leverage finally in our 'twenty 'twenty four outlook, we assume a stable coverage ratio or the allowance for credit losses to loans.

Kevin Sung Kim: Based upon the current economic outlook, we believe our allowance provides sufficient coverage for future credit risk and we currently do not see any emerging systemic concerns in our loan portfolio.

Kevin Sung Kim: Moving on to slide 16.

Kevin Sung Kim: 'twenty 'twenty four will be a building year as we continued to make progress on our reorganization and begin to realize its benefits. We believe our efforts will generate better results and we now have a clearer view of the banks medium term potential post <unk>.

Kevin Sung Kim: The organization.

Kevin Sung Kim: We are sharing with you some of our medium term targets that we are driving toward.

We would note that the assumptions underpinning our targets are based on the current implied forward curve, a constructive macroeconomic backdrop and continued modest economic growth over the medium term using.

Kevin Sung Kim: Using these assumptions and with the realization of benefits from our strategic reorganization over the medium term we expect first.

Kevin Sung Kim: Diversified loan growth in the high single digit percentage range.

While maintaining a loan to deposit ratio below 95%.

Second Andrew.

Annual revenue growth outpacing loan growth, which translates to revenue growth of greater than 10% in the medium term supported by loan growth accelerated.

Kevin Sung Kim: C income growth and Unexpendable net interest margin, we expect the net interest margin to expand not only because of interest rate changes, but because of a stronger deposit base. Our reorganization is focused on generating core deposit growth and expanding customer wallet share.

Third.

Operating efficiency ratio under 50% driven by strengthened revenue growth continued expense management discipline and operational process improvement and finally, we expect these drivers will in aggregate enable us to deliver an attractive level of written.

Operator: Good afternoon, and welcome to the HOPE Bancorp 2023 4th Quarter Earnings Conference Call. All participants will be in a listen-only mode.

Operator: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2.

Turns with a return on average assets greater than one 2% in.

In summary, as we sit here today, we are excited about the medium term growth prospects for Banco Pope and we believe the path to improved profitability is firmly within our rich.

Operator: Please note this event is being recorded. I would now like to turn the conference over to Angie Yang, Director of Investor Relations. Please go ahead.

Angie Yang: Thank you, Daniel. Good morning, everyone. And thank you for joining us for the Hope Bank Corp 2023 Fourth Quarter Investor Conference call. As usual, we will be using a slide presentation to accompany our discussion this morning, which is available on the Presentations page of our Investor Relations website. Beginning on slide 2, let me begin with a brief statement regarding forward-looking remarks. The call today contains forward-looking projections regarding the future financial performance of the company and future events. These statements may differ materially from actual results due to certain risks and uncertainties. In addition, some of the information referenced on this call today is non-GAAP financial measures. For a more detailed description of the risk factors and a reconciliation of GAAP to non-GAAP financial measures, please refer to the company's filings with the SEC as well as the safe harbor statements in our press release issued this morning. Hope Bancorp assumes no obligation to revise any forward-looking projections that may be made on today's call.

With renewed energy from our strategic transformation initiative that is well underway. Our team is excited to move forward together to build a stronger better and more efficient regional bank enhancing the value of our franchise for all stakeholders with the long term and I look forward.

To keeping you apprised of our ongoing progress as we continued to strengthen our position as one of the leading Asian American banks in the United States with that operator, please open up the call.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.

If youre using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

The first question comes from Chris Mcgratty from K B W. Please go ahead.

Okay.

Hi, This is <expletive> Metopic is on for Chris.

Alright.

Maybe just starting with the NII guide is a low single digit declines how does the NII outlook change if we get less rate cuts this year.

Angie Yang: Now we have allotted one hour for this call. Joining from the management side today will be Kevin Kim, Hope Bancorp's Chairman, President, and CEO; Juliana Baliska, our Chief Financial Officer; and Peter Ko, our Chief Operating Officer, is also here with us as usual and will be available for the Q&A session. With that, let me turn the call over to Kevin Kim. Okay, Kevin? Thank you, Angie. Good morning, everyone, and thank you for joining us today.

If we get fewer rate cuts. This year, then our outlook well.

Yes.

It will probably get a little bit worse, but not substantially so because.

On one hand that we show the drivers behind our interest rate.

Our net interest income outlook are as follows and we tried to loan growth, which well wishes irrespective of the interest rate outlook.

Kevin Sung Kim: Now, let's begin on slide three with a brief overview of the quarter. For the fourth quarter of 2023, we earned net income of $26.5 million, or $0.22 per diluted share. Income this quarter included two notable items, the FDIC special assessment of $3.1 million after tax, and

Of course, where our cost of funds is having.

Having five interest rate cuts in the coming year is will allow us to start to.

I realize the beta on the downward repricing of deposit costs. However in the beginning we are lagging our beta assumptions. So we're really not picking up deposit cost improvement until the latter half of the year.

So I'm not sure it'll be as substantially material impact if the rate cuts you know if he atlanta with three versus say five.

And the third driver of our improved net interest of net interest margin improvement will come I mean, not just mentioned excuse me net interest income improvement will come from deposit growth focused on them.

Expanding customer wallet share and getting more operational deposit accounts, but the the part between <unk> 23, and for Q24 that is going to occur regardless of cuts, it's going to be to decrease to our NII from the net impact from the P. T F P, which because of the spread you're able to earn on the earnings.

Cash contributed.

$4 million for the fourth quarter net interest income right. So that is going to be in there regardless of the cuts and then if we get slower cuts then we're not going to experience downward repricing of the loan portfolio as quickly where on the variable rate loans, that's 100% beta right away upfront. So I don't think.

You know, whether we're getting three four or five cuts, it's going to make a substantial change to our <unk>.

Interesting alright interest income outlook.

And.

You know if the cuts are delayed from the current projections that we have I think the impact on the 'twenty 'twenty four earnings would.

It would be more moderate, but we would see more of the benefits in 25 years and beyond so in the midterm.

Horizon.

I think our projection that we are sharing today would stand.

Yeah.

Great. Thank you and if I could just ask one more.

Maybe on a potential capital return just given.

E T one north of 12% and the stock below book, you know any discussions around.

The buyback in 'twenty four 'twenty five.

Thanks.

Yes.

You know as we mentioned we have a strong capital base and with our strategic reorganization, we are well positioned to take advantage of growth opportunities in 2024.

This means that we do not have noticeable change from our position three months ago in terms of our share repurchase plan.

Okay. Thank.

Thank you for taking my questions.

Okay.

As a reminder, if you have a question please press star one.

The next question comes from Gary Tenner of D. A Davidson. Please go ahead.

Thanks, Good morning, everybody.

I had a question about the expense guide for the year the year over year or fourth quarter to fourth quarter, obviously down greater than 5% as you think about the any remaining cost saves from the restructuring.

And for the first half of the year versus the <unk>.

Typical seasonal increase from payroll et cetera is the.

First quarter or second quarter, a little bit above fourth quarter, and then other kind of more of a back half of the year decline just thinking about the kind of quarter by quarter trajectory there.

Hi, Gary Thank you no actually because of the cost savings that are rolling through and because the cost savings already in our fourth quarter run rate only started after the which happened in October youre, not going to see that that that year over year, our usual first quarter bump up is going to.

To be offset by cost saves.

Okay. Thank you and then.

Follow up on the net interest income.

Hi.

What.

What deposit beta assumptions are you assuming.

Relative to the.

Clive touched potentially this year that you've got in your guide.

Sorry can you what kind of beta assumptions, we are assuming relative to it.

So the five cuts you've got in your NII guide, what kind of trough yeah. So.

And that so for example, just to put some context around this our total deposit beta on the up cycle.

We are assuming is going to be by the time, it's fully realized.

Before they start to cut because you still have a little bit of more repricing going onto market out of the back book, it's going to be over 60.

80% right, but on the beginning of the rate cuts, we're assuming a total deposit beta of under 30%.

And we're still kind of trailing in that 30% handle into the fourth quarter. So we really don't assume the beta on.

Down on the downward side to really kind of start to flow into our numbers until 2025.

Alright, thank you.

Yeah.

This concludes our question and answer session I would like to turn the conference back over to management for closing remarks.

Thank you once again, thank you all for joining us today, and we look forward to speaking with you again.

Months.

Thank you so long everyone.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.